At Insider Monkey we track the activity of some of the best-performing hedge funds like Appaloosa Management, Baupost, and Tiger Global because we determined that some of the stocks that they are collectively bullish on can help us generate returns above the broader indices. Out of thousands of stocks that hedge funds invest in, small-caps can provide the best returns over the long term due to the fact that these companies are less efficiently priced and are usually under the radars of mass-media, analysts and dumb money. This is why we follow the smart money moves in the small-cap space.
Taro Pharmaceutical Industries Ltd. (NYSE:TARO) shares haven't seen a lot of action during the second quarter. Overall, hedge fund sentiment was unchanged. The stock was in 10 hedge funds' portfolios at the end of June. The level and the change in hedge fund popularity aren't the only variables you need to analyze to decipher hedge funds' perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That's why at the end of this article we will examine companies such as BankUnited, Inc. (NYSE:BKU), Cantel Medical Corp. (NYSE:CMD), and LiveRamp Holdings, Inc. (NYSE:RAMP) to gather more data points. Our calculations also showed that TARO isn't among the 30 most popular stocks among hedge funds (see the video below). Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Hedge funds' reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn't keep up with the unhedged returns of the market indices. Our research has shown that hedge funds' small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the market by 40 percentage points since May 2014 through May 30, 2019 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.
Unlike former hedge manager, Dr. Steve Sjuggerud, who is convinced Dow will soar past 40000, our long-short investment strategy doesn't rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. Let's analyze the latest hedge fund action encompassing Taro Pharmaceutical Industries Ltd. (NYSE:TARO).
What have hedge funds been doing with Taro Pharmaceutical Industries Ltd. (NYSE:TARO)?
At Q2's end, a total of 10 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from the first quarter of 2019. The graph below displays the number of hedge funds with bullish position in TARO over the last 16 quarters. With hedge funds' capital changing hands, there exists a select group of notable hedge fund managers who were boosting their stakes substantially (or already accumulated large positions).
Among these funds, Renaissance Technologies held the most valuable stake in Taro Pharmaceutical Industries Ltd. (NYSE:TARO), which was worth $47.2 million at the end of the second quarter. On the second spot was Arrowstreet Capital which amassed $13 million worth of shares. Moreover, Citadel Investment Group, D E Shaw, and Millennium Management were also bullish on Taro Pharmaceutical Industries Ltd. (NYSE:TARO), allocating a large percentage of their portfolios to this stock.
Because Taro Pharmaceutical Industries Ltd. (NYSE:TARO) has faced declining sentiment from the aggregate hedge fund industry, logic holds that there was a specific group of hedge funds that decided to sell off their full holdings last quarter. Intriguingly, Jeffrey Talpins's Element Capital Management dropped the largest investment of the "upper crust" of funds followed by Insider Monkey, totaling about $0.5 million in stock, and Andrew Feldstein and Stephen Siderow's Blue Mountain Capital was right behind this move, as the fund cut about $0.2 million worth. These moves are interesting, as total hedge fund interest stayed the same (this is a bearish signal in our experience).
Let's go over hedge fund activity in other stocks similar to Taro Pharmaceutical Industries Ltd. (NYSE:TARO). These stocks are BankUnited, Inc. (NYSE:BKU), Cantel Medical Corp. (NYSE:CMD), LiveRamp Holdings, Inc. (NYSE:RAMP), and Ormat Technologies, Inc. (NYSE:ORA). This group of stocks' market valuations are similar to TARO's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position BKU,19,480363,0 CMD,11,146585,-7 RAMP,22,309228,-1 ORA,9,169084,0 Average,15.25,276315,-2 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 15.25 hedge funds with bullish positions and the average amount invested in these stocks was $276 million. That figure was $72 million in TARO's case. LiveRamp Holdings, Inc. (NYSE:RAMP) is the most popular stock in this table. On the other hand Ormat Technologies, Inc. (NYSE:ORA) is the least popular one with only 9 bullish hedge fund positions. Taro Pharmaceutical Industries Ltd. (NYSE:TARO) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we'd rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately TARO wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); TARO investors were disappointed as the stock returned -11.7% during the third quarter and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as many of these stocks already outperformed the market so far in 2019.
Disclosure: None. This article was originally published at Insider Monkey.